The way some companies are created is often a little different. But to virtually have agreed to form a company with someone you have only ever spoken to over the phone certainly ranks among one of the more unusual ways of doing things. That though is exactly what Roger Morris, managing director, and Simon Mouncher, operations director did at the start of 2001 when they created em-financial. At the time Mouncher had created a mortgage broker called Trident Mortgage Solutions, having worked previously for Advantage and Halifax. Meanwhile, Morris was working for packager Oryen.
They had never met, having only dealt with one another on the telephone but as Morris says: “We just knew that we understood each other and we had dealt with each other over a period of time enough to know we had a fundamental belief in the same proposition.”
Getting things off the ground was not a simple task, however, with Morris based in Teesside and Mouncher based in Chester. When the company was created it had a staff of just seven, with two based in Chester including Mouncher, and the rest – taken by Morris with him when he left Oryen – based in the North-East. Now the company employs around 80 staff in Chester, Teesside and East Kilbride.
Today em-financial ranks alongside some of the larger packagers in the country and considering its fairly humble beginnings has seen phenomenal growth in the last six years. Such growth has a lot to do with the fact that Morris saw the need for the distributor to gain a national presence as early in the life of the company as possible.
“We needed to get national coverage and I realised early on that if we wanted to get the kind of volume to get that coverage we needed to get involved with the networks. We also needed an operation in London, so we set up em-residential with Mortgagematch Home Loans. I worked as a business development manager for em-residential in London at that time. We were doing £2m to £3m a year with GMAC-RFC and we asked the lender if it would create a branded proposition with us and give us two full-time underwriters. That was 2002 and the first time we got into branded lending, which was admittedly quite quick.”
Mouncher adds: “At the time the amount GMAC wanted in terms of business levels to get into branded lending were too great for us to do on our own. We got on well with the guys from Mortgagematch Home Loans and putting our businesses together meant we had enough to achieve what we wanted to.”
There was a further reason for reaching out beyond its initial base of operations in Teesside, which Morris says was largely down to loan size. In 2002 em’s average loan size was around £27,000. The packager also had a lot of business where the value of the property might be less than £25,000. Meanwhile the minimum loan sizes most lenders were asking for were going up to £30,000 on average, which Morris says was “nearly killing our business because the majority of that business was primarily in the North-East.”
The agreement with Mortgagematch saw both companies share 50% each of em-residential. But the joint venture no longer exists and both Mouncher and Morris readily admit the reasons for this. “Many packagers became suspicious about GMAC and there was the rumour it was to introduce a flat fee of £500 for packagers no matter what the size of the case was and we thought if it went to that – given the overheads of running an office in London and everything that went with that – the business was not going to continue to be a viable option.”
While this never actually happened, both men felt the cost of running an office in London became hard to justify and eventually this led to Mortgagematch and em dissolving their partnership.
But the partnership had served em well, as it had by now established the national presence Morris had desired. And the volume of business both Mortgagematch and em were by now doing independently of each other was such that GMAC was happy to maintain its branded lending proposition with both separately, which continues to this day.
The business now has a more centralised approach. Where in the past it had offices around the country now its operations are based predominantly in Chester and Teesside. As Mouncher explains: “At the time, having offices around the country was the right idea but managing all those offices was pretty tricky. Everything was geared towards a national presence and to manage things remotely is very difficult.
“The networks initially appeared to prefer to see you as a packager with offices everywhere but when it got down to it they weren’t actually that bothered. They just wanted a service proposition that stood up. So after a while we began to bring a lot of those processes back into the office we have here in Chester. And from an operational point of view I wanted everything under one roof that I could control so now all the main processing is done here. I don’t think you can offer a better service than that because the case doesn’t leave the building.”
The concept of keeping operations centralised even applies to some of em’s BDMs. “If you’re a broker you don’t want a field-based BDM coming into your office when you could be dealing with a client, so a field-based ” A lot of brokers have never understood that there is no middle man any more. We do everything for the lender, complete the case and then give it to them to release the funds. The value in what we do now is in our systems”BDM stops an appointment. A desk-based BDM can phone a broker, can talk to the broker and potentially deal with a case the broker has. We now have an online system called Minute Man that can source products for brokers and they can also make an application online and within seconds it has already been underwritten,” says Morris. “So the use of technology means there’s less need for a BDM to go to a broker’s office and it’s about managing the relationship a little differently.”
Monucher adds: “Our main criteria is our field-based BDMs must have some product knowledge. Sending someone who has limited product knowledge adds no value to the relationship you have with your brokers. It’s more about relationship management. You want a broker, if they are not sure about something, to think of their BDM as the first point of contact.”
The more central approach was also in recognition of the fact that, as Morris puts it, “two years ago packaging died and it evolved into on-site remote processing”.
Mouncher adds that regulation forced packagers to reinvent themselves and investing in technology has been the key driver in the evolution of packaging.
He says: “If you look at the amount of money we have all spent on technology, we have all spent around £250,000 on technology and that’s going to cause a bit of a dent in your accounts but there comes a point where you start to see the benefit of that investment which we have all begun starting to see over the last couple of months. But then what you have got with the other guys that have not invested in technology, their business I am sure must be dropping off now. Our growth has gone from 700 applications in January, 800 in February and over 1,000 in March, so that must be eroding into the smaller guys and they are probably beginning to struggle and will disappear.”
Morris adds: “A lot of mortgage brokers have never really understood that there really is no middle man any more. We do everything for the lender, complete the case and then give it to them to release the funds. The value in what we do now is in our systems and that’s where the worth in our company is.”
The investment in technology and bringing its processes under one roof has also meant em has been able to control its costs much better, enabling it to offer fee-free valuations and cover the legal costs on the mortgages it offers. Asked how this is not costing the business money Mouncher says: “We just thought it would be Tworth taking the initial hit and if the business grew significantly enough in terms of scale then we would actually make more money. It is basically about increasing volume by offering free valuations and free legals.”
He adds: “Other packagers have asked us to stop offering free valuations and free legals but it’s not all about volume. It is also about how slick your processes are. If you can screw the process down, it takes the cost out of your business.”
Mouncher argues some consolidation among mortgage packagers is inevitable because there are some that do not have the resources to invest in technology and because others are failing to control their costs. But he says the main barrier to consolidation currently is the sheer number of lenders in the market and their need to gain volume through distribution.
“I think it would be good for the industry if packagers themselves consolidate and the lenders will love it. The problem we have at the moment it that no lender has got the balls to cut off the smaller packagers.
“Rooftop has been brilliant and the bravest by saying it will only have 50 packagers and that’s it. I know Rooftop wants to reduce that number even further. I’m sure if Platform were to do some analysis on how much business it was getting through its 250 packagers it would find it gets the majority of its business from the top 40 or 50. I think it then looks at the next 200 as a collective and reasons that it gets a certain amount of business from those packagers. But it would get that business back anyway, because those packagers would have to find another route – possibly as a satellite packager for one of the bigger boys – but they will still place the business.”
Morris adds: “Part of the problems lenders are having is down to the targets they have set themselves, so many don’t want to refuse any line of business no matter how small.”
Mouncher believes lenders have set themselves sales targets which in many cases are unreachable, leading many of them not to price their products for risk and reward properly. He says the targets lenders have been set require volume but that it is very difficult to gain volume when there are so many other lenders competing in the market.
“It’s almost a situation,” he says, “where we could be heading in the same direction as the US market in that the US market went wrong because lenders didn’t price risk against reward, all the correspondent lenders went to the wall, so you have got to question with the new entrants to the market over here, are they making money? How long can they stand the market? Do they want to stay? Will the US investment banks see the writing on the wall decide they don’t want a piece of that and go scurrying off back across the pond?
“Something has got to happen but the people that should make the changes are the lenders, and if you’ve ” We could be heading in the same direction as the US market in that the US market went wrong because lenders didn’t price risk against reward”got that many packagers on your panel you have got to have the people to look after all those relationships.”
But Morris argues any slowdown in the sub-prime market will be less dramatic. Even so, he says packagers that have invested in technology should have fewer problems should a slowdown in the market occur.
“If the market does slow down by even 10%, which is dramatic, it doesn’t really affect us in the same way because, say we do 1,000 applications a month, compared with HBOS that’s absolutely nothing so it’s easier for us to control our own destiny. If we can come up with great technology, give the broker more money and the client a better deal then we can buck the trend because we are small enough to buck the trend. This is what the packaging market is doing at the moment and lenders have not necessarily picked up on it.”
Where some consolidation may occur in the packager market will be through the back door, according to Morris. He says: “A good portion of the packaging market – Solent Mortgage Services, Enterprise, Praxis and others – are going for satellite packaging. So they are offering satellite packagers their IT systems, their lender panel and in most cases they are going to get volume growth by taking over other packagers. But this is going on under the radar because those satellites are continuing to operate under their own trading name.
“It’s basically franchising by the back door without the onus of all the contracts and everything else. That’s one concept. The other is what we are doing. We are developing our own system and our process and our internal attitude for the broker to perceive he is dealing with a small company with a small company ethos. What we want to do is drive volume, if you deal with satellite packagers and those satellite packagers are not that great at the actual process of packaging, then that slows down the parent or larger packager so we don’t think dealing with satellite packagers is the way forward.”
Mouncher believes some packagers, in trying to grow volume business are doing so in the wrong way, through such satellite packaging agreements to the point where they are unable to control their costs and losing money rather making it.
“The problem you have got with satellite packaging is say we deal with just over 1,000 cases this month, if they all complete we will retain £1,100 per case but with satellite packaging if you do 800 cases a month, of which 250 are satellite packaged their net retained will be less so it will end up being about 550 so although it may appear that they may be doing a lot of business it’s not as profitable.” he says. “It’s a balance between volume and profit. If you look at some of the other packagers, they say they are doing a lot of business but are not making a lot of money.”
Morris adds that some packagers have made satellite packaging agreements with appointed representatives of networks. And while a network will pay 85% of the gross income to the packager, he says, what that packager has forgotten is that it has to pay an override to the network. “We know of two satellite agreements where the total combined money – in terms of the money the packager pays its satellite and the override it pays the network – is 107% of the income it receives. So it has gone for greed and the person that has brokered the deal is not aware of the override. So some packagers are going for volume but they are simply doing it to be able to say they are doing larger volumes. The problem is they are going about it the wrong way.”
The evolution of the packager market is also the main barrier to the creation of a common IT trading platform, for several reasons, says em.
Mouncher says lenders do not talk to each other properly and are unlikely to ever agree on what a com” Some packagers are going for volume simply to be able to say they are doing larger volumes. The problem is they are going about it the wrong way”mon trading platform should be able to do. Meanwhile, although packagers work together through their alliances or associations several packagers have developed their own IT platforms and have now invested too much money in those platforms simply to scrap them in favour of another IT solution.
He adds: “A common trading platform is pie in the sky. Take the Regulatory Alliance of Mortgage Packagers, for example. We have developed a system, SMS, Enterprise and The Finance Company have also all developed their own platforms, so the top four guys at RAMP have created their own trading platforms.
“What we should have done was three years ago, instead of all us spending £250,000 on separate trading platforms, we could have developed one together for the same money. But that wasn’t how the market was then. It has changed now and we all talk to each other more now. Packagers are working more closely together and sharing ideas and lenders are going to cherry-pick who they deal with in terms of when they develop new technology. So say GMAC develops a new platform it will give it to its top 10 accounts first to give them some competitive advantage.”
But Morris adds that the advantage of having its own IT platform means it can make changes to it whenever necessary which would not be possible with a shared IT solution.
While packagers are beginning to work more closely with each other, Morris says the recent Packager Summit was still an important milestone for many in the industry. “At Nice,” he says, “it was recognised that the associations need to come together and speak to one another on different issues. I think the complexities of bringing everyone from those associations together was similar to the peace treaty in Northern Ireland. There are egos within those organisations which need to leave their problems with each other behind and sometimes it’s better for an organisation to have an independent like John Rice to run things.
But asked whether there might be some consolidation between the associations in the future Mouncher says “I don’t think there will be consolidation. There may actually be more of them and more of them are letting a greater number of members in.”